Today, the Financial Industry Regulatory Authority (FINRA) announced that Wells Fargo Investments, LLC was fined $2 million for making unsuitable investments in connection with the sale of reverse convertible notes and for failing to provide required sales charge discounts on Unit Investments Trust (UIT) transactions. FINRA also took the unusual step of requiring Wells Fargo to pay restitution to customers who did not receive UIT discounts and to those who were placed in unsuitable reverse convertibles. More often than not, FINRA will levy a fine on the brokerage firm and leave investors to fend for themselves and try to recoup their losses through FINRA’s securities arbitration process.
What are Reverse Convertible Securities?
Reverse convertibles are short-term investments that are tied to an underlying stock or bond. When the security matures, the investor will receive either 100% of the original investment or a predetermined number of shares. When investing in reverse convertibles, investors risk losing a significant portion of their investment if the value of the underlying stock or bond falls below a certain level at maturity. For example, in a reverse convertible bond fund, an investor may be forced to redeem their bonds at a decreased value.
Wells Fargo’s Failure to Review Suitability of Reverse Convertible Transactions
FINRA found that Wells Fargo, through one broker, had recommended hundreds of unsuitable reverse convertible transactions. Of the 21 accounts that were found to have unsuitable reverse convertibles, fifteen of those belonged to elderly customers who were over 80 years old. These customers were exposed to risk inconsistent with their investment objectives that resulted in an overconcentration of reverse convertibles in their accounts.
Wells Fargo’s Failure to Provide Eligible Customers with UIT Discounts
UITs offer discounts on purchases that exceed certain “breakpoints” or involve proceeds from another UIT during the initial offering period. FINRA found that Wells Fargo failed to provide eligible customers with “breakpoint” and “rollover and exchange” discounts due to the firm’s lack of systems for review to ensure that UIT customers received the proper discount.